Whistleblowing and Sarbanes-Oxley Act

In the wake of corporate malfeasance involving high-level publicly traded companies such as Enron, Arthur Anderson, WorldCom, Adelphia, Tyco, and other corporations, the U.S. Congress enacted the landmark Corporate and Criminal Fraud Accountability Act (Sarbanes-Oxley Act), with the view to providing for sweeping reforms in the way that these corporations account for and make public disclosures under federal security laws (Baynes, 2002).

In an attempt to fight corporate fraud and reform corporate business practices in the U.S., Congress enlisted the services of corporate officers, directors, and employees in requiring that those who witness corporate fraud do report what they know about it in return for protection against retaliation provided for under the whistleblower protection provisions contained within the Sarbanes-Oxley Act (Watnick, 2007). The present paper uses a whistleblowing case involving SpongeTech Delivery Systems not only to illuminate the causes surrounding the passage of the Act but also to determine various protections afforded to whistleblowers under the Act.

Whistleblowers, according to Steinberg and Kaufman (2005), have distinct characteristics that reinforce their capacity and willingness to disclose information relating to corporate fraud.

These authors acknowledge that whistleblowers are not only altruistically or selflessly motivated by the concern for the welfare of others, but also demonstrate a utilitarian philosophical orientation particularly in terms of maximizing the total benefits of their actions. Additionally, most whistleblowers seem to be well-educated individuals holding professional positions in the corporate world, not mentioning that they allow their attitudes and beliefs to guide them (Watnick, 2007).

Recently in June 2014, SpongeTech Delivery Systems, a publicly-traded company headquartered in New York but with business interests abroad, was “ordered by the U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA) to pay $31,835.33 in back wages to a former employee who was fired after she reported apparent investment fraud to her superiors” (OSHA Regional News Release, 2014, para. 1).

From the case, it is clear that the company had earlier been engaged in the publication of fictitious sales and product orders within the European market to enhance the sale of its stock through fraudulent means. The whistleblower reported these fictitious transactions to the senior management upon their exposure while she was representing the company in a trade show in the Netherlands (OSHA Regional News Release, 2014).

The employee’s bold action to report the issue saw her dismissed from employment, leading to loss of credibility as well as physical and psychological isolation. On its part, the company lost money through costly lawsuits and subsequent restitution, not to mention that its reputation was negatively affected and the involved senior managers were sent to jail.

From the case, it is evident that the whistleblower was justified in reporting the company’s actions to her superiors irrespective of the fact that she may not have known that the fraudulent transactions had the blessings of the company’s senior management. Under the Sarbanes-Oxley Act, employees are encouraged to report any “suspect actions that have been committed and are reasonably believed by the reporting person to be criminal fraud or other violation of federal law” (Watnick, 2007, p. 845).

In the mentioned case, the employee reported the fraudulent activities (publication of fictitious sales and product orders to enhance the sale of stock) based on her reasonable belief that an infringement of federal securities laws or regulations had occurred due to the noted investor fraud, hence the justification.

It is reported in the literature that “loyal employees with information to report about their corporate employer will only come forward readily – to protect investors and individual shareholders against corporate fraud – when they believe that their livelihoods will be protected in an immediate and real way” (Watnick, 2007, p. 834). Because the whistleblower in the case dutifully and responsibly exposed investor fraud, she qualifies for various protection provisions contained in the Sarbanes-Oxley Act.

From the case, it is evident that the employee has already benefited from the Act’s protection concerned with availing a legal remedy for wrongful termination of employment. The employee was wrongfully discharged from employment after reporting the investor fraud to her superiors, hence the decision by OSHA for the company to pay her $31, 835.33 in back wages (OSHA Regional News Release, 2014).

The whistleblower is also protected under the Sarbanes-Oxley Act in terms of safeguarding her confidentiality and hence protecting her future career engagements. Available literature demonstrates that public-traded corporations are required under the Act to institute effective ways through which internal whistleblowers can successfully file their allegations with the audit committee without compromising their confidentiality or feeling intimidated (Baynes 2002).

Additionally, the whistleblower is protected from any criminal retaliation SpongeTech Delivery Systems may wish to institute against her for providing truthful information to relevant law enforcement agencies about the investor fraud. Some companies may want to institute criminal proceedings against employees considered as whistleblowers with the view to defeating justice (Watnick, 2007), hence the need for this protection.

Lastly, the whistleblower is certain to receive her compensation and other protections as discussed in this section because the Act gives the Securities Exchange Committee (SEC) authority to impose criminal penalties to SpongeTech Delivery Systems for any violation of the whistleblower related provisions.

Overall, it is clear from the discussion that the Sarbanes-Oxley Act may be the ultimate tool for protecting whistleblowers and minimizing corporate fraud in the U.S. The protections afforded to whistleblowers by the Act have continued to encourage employees to report what they perceive as corporate fraud without fear of reprisals.

References

Baynes, L.M. (2002). Just pucker and blow? An analysis of corporate whistleblowers, the duty of care, the duty of loyalty, and the Sarbanes-Oxley Act’, St. John’s Law Review, 76(4), 875-896.

OSHA regional news release. (2014). Web.

Steinberg, M.I., & Kaufman, S.A. (2005). Minimizing corporate liability exposure when the whistle blows in the post Sarbanes-Oxley era. Journal of Corporation Law, 30(3), 445-463.

Watnick, V. (2007). Whistleblower protections under the Sarbanes-Oxley Act: A primer and a critique. Fordham Journal of Corporate & Financial Law, 12(5), 831-879.

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